1. Read the information presented on the "zero inflation target" Reference:

What rate of inflation should a central bank aim for? Arguments The case FOR near-zero inflation The case for living with MODERATE inflation The costs of inflation (shoeleather, menu, etc) can be The benefits of moving from moderate to near-zero substantial even for low levels of inflation inflation are small, but the costs are large Estimates: must sacrifice 5% of a year's GDP for each 1% reduction in inflation Reducing inflation would have temporary costs (higher unemployment) but permanent benefits the temporary costs could be reduced if the commitment to near-zero inflation is credible = meaning that it reduces the expected inflation rate Disinflation would leave permanent scars = Investment falls, lowering the future capital stock Workers' skills diminish while unemployed Some of the inflation's costs could be reduced through more widespread indexation For your consideration... Suppose a structural change reduces the demand for university administrators, lowering their equilibrium real wage by 3%. Think about the answers to these questions, click the arrow if you want to see some possible answers... If the actual real wage paid to university administrators remains constant, what would be the consequences? When the actual real wage exceeds the equilibrium real wage, there is a surplus of labor, which represents wasted resources Afallin the wage would alleviate the surplus o it would encourage some administrators to switch to university teaching or private sector employment it would increase the quantity of administrators demanded Would it be easier to achieve the 3% real wage reduction if the inflation rate is 0% or if it 4%? Why? To restore labor market equilibrium under 0% inflation, administrators would have to accept a 3% nominal wage cut Under 4% inflation, they would have to accept a 1% nominal wage increase The second scenario is more likely, as many people suffer from "money illusion" and focus on nominal variables rather than real ones